The changing dynamics of the global oil and gas market has necessitated a drastic shift from ‘business as usual’, as oil dependent countries such as Ghana is seeking to ramp up petroleum revenues but this cannot be achieved until a reform of the current fiscal regime.
By establishing Production Sharing Regimes, oil producing countries have been able to generate massive revenues, contributing hugely to the GDP of their economies. Nigeria, for instance, has its oil revenues contribute 9.25 per cent at Q1 of 2021, according to Statista.
According to the Public Interest Accountability Committee (PIAC), in the first five years (2011-2015) of commercial production of oil, the country realized US$3.3 billion from petroleum revenues. This represents only 19 per cent of total production revenue while foreign oil companies accrued 81 per cent. At the time, Ghana operated the Royalty/Tax System used for the Jubilee field.
Current fiscal regime accrues less revenue
However, due to the limited revenue accrued, and triggered by the quest to maximize revenue, a new system was sought after— the ‘hybrid system’ (Royalties/Tax System and Profit-Sharing Agreement) which was touted as many times superior to the Royalty/Tax system and backed by Act 919, enacted in 2016.
With this new system, having been operational for the past five years (2016-2020), petroleum revenues have generated approximately US$3.25 billion. This is despite the influx of new multinational corporations who trooped into the upstream sector for exploration and development.
Thus, it appears evident that the current fiscal regime needs to be reviewed as revenues accumulated thus far, have been very minimal relative to that of peers in the region.
The Institute for Fiscal Studies’ (IFS) Dr Said Boakye in a recent research showed that government’s petroleum revenue as a share of the value of production averaged 17.9 per cent from 2015-2018, compared with an average revenue of 51.6 per cent for Nigeria.
Therefore, in this new era of capital discipline, where foreign oil companies (FOCs) are almost at a ‘chokehold’ by climate change activists and financial institutions, operating under the current fiscal regime will be problematic in the coming years.
Considerations for the adoption of a Production Sharing Agreement (PSA) regime is not a new phenomenon. The IMF has been knelling the bell for the adoption of PSA in extractive industries across countries.
PSA regime to maximize oil revenues
This cannot be said any plainer, as the IMF’s fiscal affairs department, in 2012 profoundly stated: “…Data here suggest that in mining, governments commonly retain one-third or rather more; simulations suggest higher government shares (40–60 percent), but do not capture all possible sources of revenue erosion. They also suggest that the government share is higher in petroleum: around 65–85 percent. Fiscal regimes that raise less than these benchmark averages may be cause for concern, or— where agreements cannot reasonably be changed— regret.”
For not adopting Production Sharing Agreement (PSA), the Centre for Natural Resources and Environmental Management (CNREM) revealed that as at September 2017, Ghana had lost US$7.7 billion in oil revenues.
Per CNREM calculations, should Ghana have adopted a PSA regime for all the years (between 2010 and end September 2017), the country would have accumulated approximately US$11.30 billion. This represents a total revenue share of about 61 per cent whereas foreign oil companies would have accrued 39 per cent.
Dr Said Boakye of the Institute of Fiscal Studies recommended that: “Government should increase Ghana’s paid and participating interests in the existing oil joint ventures by purchasing additional interest so that the country’s interest in each joint venture increases to at least 55 per cent while maintaining the production sharing arrangements.”
Considering the foregoing, it is important that whilst the government is rallying behind the National Oil Company in the bid that it can assume operations in the nation’s upstream sector, the fiscal regime at play should be reformed to reflect the changing dynamics in the sector.